Commission Offers Estimated Prices to Entice Reluctant Broadcasters to Participate in Auction to Sell Their Airwaves

The Federal Communications Commission is adopting a hard-sell strategy for next year's spectrum incentive auction in an effort to entice reluctant broadcasters to participate.

To win over TV broadcasters, FCC Chairman Tom Wheeler is making the case that the spectrum auction is a unique opportunity.
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At the auction, TV stations will take bids to sell their airwaves and either go out of business or be relocated to a new channel. The FCC will then auction the spectrum to wireless carriers to meet the exploding demand for mobile broadband. Observers have called the auction the most complex undertaking attempted by the FCC recently.

The broadcasters have thrown up roadblocks throughout the process and are currently challenging aspects of the FCC's order in court, though they say they are fine with the auction as long as it remains voluntary.

To win them over, FCC Chairman Tom Wheeler is making the case that the auction is a unique opportunity for TV broadcasters and has hired an investment bank,
Greenhill
GHL 0.26%
& Co., to prepare a pitch document that it will send to every eligible TV station in the country. The document attempts to spell out how broadcasters stand to benefit from participating in the auction—including dollar estimates in every market.

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"What we've been saying is, you know what, there might just be a higher and better use for that spectrum that will put more money in your pocket," Mr. Wheeler said in a phone interview.

The auction represents in many ways an existential threat to the broadcasting industry, as it could result in dozens of stations going off the air. The latest information from the FCC indicates the auction could affect more stations and markets than initially thought, partly because of the high projected prices stations can expect to receive for their spectrum in large urban and suburban markets.

An FCC official said the document makes it clear that the auction is voluntary, and that stations are free to back out at any time. Stations that choose to sell their spectrum have multiple options: go off-air, enter into a channel-sharing agreement with another broadcaster, or take less money and be relocated to a lower frequency channel, a process known as repacking. Stations that don't take part will be moved to another channel with a similar frequency and footprint.

National Association of Broadcasters spokesman Dennis Wharton said the group is glad the FCC is providing more information publicly. "That is a key part of the auction. If we can just get balanced protections for those who choose not to participate, we think we'll see a terrific auction," he said.

Of particular interest in the document is a table of the FCC's estimates for how much TV stations can expect to take home from selling their spectrum in each market. The FCC official cautioned that the figures are approximations, and said in many cases the final price would be lower depending on the demand for spectrum in specific markets.

The prices represent the value of a station's spectrum, not the business as a whole, and in many cases appear to exceed the value of the stations themselves particularly with respect to smaller stations in large cities and suburbs.

Large markets like New York, Los Angeles and Philadelphia showed the highest prices, but smaller markets like Providence, R.I., Palm Springs, Calif., and Scranton, Pa., that are near large urban areas also produced median full power station values above $100 million. The FCC official said it is because stations in those markets can produce interference that affects the large metro areas.

"This is very much a daisy-chain issue, where what happens in one market affects what happens in another market," Mr. Wheeler said.

Some estimates from the FCC's pitch document: In New York City, the median full power station was projected to take home $410 million for its spectrum, while that figure was $340 million in Los Angeles, $230 million in Philadelphia and $120 million in Chicago. Even in secondary markets like Youngstown, Ohio, and West Palm Beach, Fla., the median value of full power stations exceeded $90 million. The most expensive stations in some of those markets could get significantly more for their spectrum.

The value of stations' spectrum was calculated based on the number of people covered by their broadcast footprint and how much interference they create; stations that create the most interference are worth the most money.

The FCC's model assumed the auction would produce revenue of $45 billion and free up 100 MHz of spectrum for the wireless carriers. Those figures can be adjusted depending on auction participation. The final formula used by the FCC to price stations must be approved by a commission vote, but the model uses a formula that should produce a similar result.

"This is a model, the model can be adjusted up or down depending upon how much spectrum the broadcasters want to put up," Mr. Wheeler said.

The book also includes estimates for Class A stations, which are low power TV stations that meet certain programming conditions. Class A stations typically serve smaller footprints than their full power counterparts, but in New York and Los Angeles the median value of their spectrum was roughly $300 million a station.

The document also includes a letter from the Internal Revenue Service spelling out the tax implications of the various options. Mr. Wheeler said broadcasters have been asking the FCC for more detail on how the IRS would treat auction proceeds.

Pricing the Airwaves

The FCC has estimated how much money stations might be able to get for their spectrum in the auction. This is a sampling of some of the markets, with the maximum representing the station where the estimate is the highest in that market. These numbers refer to full-power stations; in some markets there are also Class A stations, low-power stations that meet certain programming requirements. The estimated value of their spectrum is lower.